April 27, 2007

Naomi Klein

Amazing, I actually find myself agreeing with Naomi Klein. The conclusion that is though, not her reasoning.

I agree that both the IMF and the World Bank should be shut down. Get rid of them altogether. No, not because, as Klein thinks, they are the oppressors ofthe poor and downtrodden, but because there is no need for them anymore. As we no longer have fixed exchange rates there's no need for the IMF and as we now have deep and liquid international capital markets there's no need for the World Bank. Scrap them both.

The WTO though, no. Everyone seems to forget what the WTO really is. It doesn't determine what countries may do about trade at all. It's much more like a court, in which countries are kept to the promises they have already made. For example, the US (very much the biggest bully on the block, given the size of its economy) consistently loses cases there, like the cotton and the Antiguan gambling one. The WTO does have its faults (it should dump TRIPS for example) but the essence of it, that it allows the economically powerless to enforce the promises made by the powerful, is a great idea, one that I would have though liberals would applaud.

But that's a pretty good description of the game of one-way strip poker
that is our global trade system, in which the United States and Europe
- via the World Bank, the International Monetary Fund and the World
Trade Organisation - tell the developing world: "You take down your
trade barriers and we'll keep ours up." From farm subsidies to the
Dubai Ports World scandal, hypocrisy is our economic order's guiding
principle.

There is indeed hypocrisy here and the rich countries do indeed maintain the most absurd barriers to trade. But the argument that this means that the poor countries should not lower their own barriers does not follow. Just because the EU keeps the citizens of Europe poor by imposing import duties does not mean that the citizens of The Congo should be similarly impoverished by import duties.

For, as Bastiat pointed out, just because somebody places rocks in their own harbour is no reason for anyone to place them in their own.

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Comments

you're wrong about the World Bank. Sometimes it really does seem like your economics only goes so far. There's a very large literature about market failures, poverty traps, political failure etc. etc. not to mention a consensuse that aid - once adjusted to strip out military and emergence aid - does help (I'm sure Jim can supply you with the references). There's still plenty that the World Bank can do to raiise people out of poverty faster than laisse-faire would - don't tell me you are indifferent to that?

Tim adds: As a source of advice, perhaps they can, as a bank, actually lending money, no, I think they'vebeen superseded by hte markets.

Posted by: Luis Enrique | Apr 27, 2007 11:16:21 AM

An inability to take your point about free trade is, I suspect, quite a good indicator of a low IQ.

Posted by: dearieme | Apr 27, 2007 12:37:45 PM

ah, well you might have a point there.

There are various reasons (which I suppose you could call market failures or incentive problems within the aid industry itself) why the investments that development loans have funded do not yield the returns needed to make repayments - so the recipient ends up getting pushed into borrowing money for a project with negative value, then having to pay it back at a net loss.

So the World Bank should perhaps do less lending and more grant giving. But there still may be a case for mixing loans with grants if having to pay back some money is beneficial in terms of the incentives it sets up within the recipient. I haven't expressed that very well, but a pure grant system could encourage wastefulness, whereas loans could help encourage the idea of making sure money is spent where there is a return.

The return from a state funded poverty alleviation program being, on top of the direct benefit to the now less poor, higher future tax revenues - but the cost to a poor country government of funding a poverty alleviation program purely with private sector debt might be prohibitive. Looked at in terms of increased future tax revenues, a poverty alleviation program might not have a positive net present value, because for various reasons taxes cannot fully capture the surplus and the cost of capital will be high, yet it may be a worthwhile investment from a wider social welfare perspective. So the World Bank could mix grants with a loan of the right size to match the resulting gain in tax revenues.

Does that make sense? Thinking on my feet a bit here, could be full of holes. Of course the fiscal infrastructure in these countries may be so flaky that they're never going to be able to repay such loans from taxes, in which case I suppose grants are the only way. Another question is the nature of the relationship between aid and institutional development - there are papers with titles like "the aid institutions paradox" that i haven't gotten round to reading yet.

Posted by: Luis Enrique | Apr 27, 2007 12:46:37 PM

"But the argument that this means that the poor countries should not lower their own barriers does not follow. Just because the EU keeps the citizens of Europe poor by imposing import duties does not mean that the citizens of The Congo should be similarly impoverished by import duties."

If they are not permitted to export their goods freely, please explain to me, in words of one syllable, why they should permit the goods of those who refuse to trade freely with them on to their markets without penalty? What actual, tangible, real-life economic benefit, not requiring belief in the purity of economic theology or the use of oxymorons like 'unilateral free trade '(WTF?), will accrue to the Congolese from this practice?

Similarly, precisely what does Bastiat's quote have to do with the WTO? Surely it is only valid if one assumes Bastiat would have supported a system of world 'trade' similar to the one we have now? I would be surprised if he would have.

And if one assumes, in the best traditions of Mises and Bourne, that trade is the route to peace then why should decisions made by independent states in the normal course of business be subjected to supranational arbitration? By a superannuated Fine Gael party hack like Peter Sutherland? Doesn't the WTO's very existence prove that if 'free trade' as practiced at the moment requires an enforcer, then it isn't really free at all?

Tim adds "If they are not permitted to export their goods freely, please explain to me, in words of one syllable, why they should permit the goods of those who refuse to trade freely with them on to their markets without penalty?"

Not words of one syllable but: _Because it is the goods coming in, the imports, which make you richer. All the people get to buy hte cheap imports. That makes them richer.

Bastiat would indeed have liked free trade globally. He used to argue for it actually.

"Because it is the goods coming in, the imports, which make you richer. All the people get to buy hte cheap imports. That makes them richer."

If they can't generate currency from the sale of their own goods- precisely what do they buy them with?

This is where all the 'imports make us richer' stuff falls on its backside. If you have no money to buy imports, what's the point of allowing them?

Tim adds: What's the point of making exports iof you're then going to charge yourself for the imports you buy with them? By doing that you're getting less imports for th effort you've put into making the exports, haven't you? Sounds like a wildly silly thing to do.

"What's the point of making exports if you're then going to charge yourself for the imports you buy with them?"

Agreed, absolutely.

But what is also the point of making exports if you can't sell them somewhere else?

"By doing that you're getting less imports for th effort you've put into making the exports, haven't you?"

Agreed - with the qualification stated above.

"Sounds like a wildly silly thing to do."

What is wildly silly is undercutting your domestic production by agreeing to accept products of other nations when they will not accept your own. Yes, your own citizens have a 'choice' of products which theoretically (and only theoretically) enriches them - but how are they to generate the money to actually buy them?

That's the question you haven't answered.

Tim adds: "But what is also the point of making exports if you can't sell them somewhere else? " Then you use them domestically, obviously. The aim is to provide the populace with the things that they desire as cheaply as possible.

There's absolutely no difference between a household and a nation on this point. I buy bread from the supermarket because it's cheaper (including my labour of course) than making it myself. In fact, I import just about everything into my household and export my labour.

Fine. Can we have our shipbuilding industry back? The recent business involving sailrs being taken hostage by state-sponsored pirates in open waters shows we could do with another couple of aircraft carriers.

Sorry, I forgot. It's OK for the Poles and the Koreans to subsidise their shipbuilding and for the British to buy from them, but somehow not OK for British shipbuilders to be subsidised.

I don't see how that is any kind of free trade. I must be missing something.

"The aim is to provide the populace with the things that they desire as cheaply as possible."

No, Tim. ';The things that are sold to them by the advertising industry' would be more accurate. All that humans really desire is food, heat and shelter. Everything else is superstructure.

"There's absolutely no difference between a household and a nation on this point. I buy bread from the supermarket because it's cheaper (including my labour of course) than making it myself. In fact, I import just about everything into my household and export my labour."

What happens when you don't have a choice of supermarkets? Couldn't Tesco, holding as it does 51% of the grocery market in both Milton Keynes and Inverness, be tempted to behave monopolistically? And start predatory charging?

You can vote out the council every few yearsfor sure - but voting out the supermarket is impossible.

Tim adds: you vote for or against the supermarket every time you do or do not spend your money there.